Banks, non-bank lenders are bracing for at least a Rs 7,000 crore industry-wide hit in the quarter ending March 31, as they await government clarity on who foots the bill for the ‘interest on interest’ waiver, three senior banking executives told CNBC-TV18.
"Banks had asked IBA (Indian Banks Association) to make a representation to the government, and seek clarity on the compound interest matter. IBA reached out to the government, but they have not responded to us yet," said the head of a large public sector bank on the condition of anonymity.
"We (banks) have decided that we will fully provide for the refund amount in the March quarter, and see what stand the government takes on the matter. If they agree to cover the cost, we will be able to write back these provisions," said another senior banker on the condition of anonymity. This banker added that this decision was taken unanimously by lenders in a meeting held by IBA after the Supreme Court order was made public.
Bankers believe that even if the government agrees to bear the burden of this waiver, it was unlikely to compensate bankers immediately. Therefore, the required provision would have to be made now irrespective.
The Supreme Court had ruled that no compound or penal interest would be charged from borrowers for the entire six-month loan moratorium period, which was announced last year amid the COVID-19 pandemic. The apex court also ruled that the amount already charged would have to be refunded, credited or adjusted.
According to people in the know, the Indian Banks Association calculated the "interest on interest" cost for loans of over Rs 2 crore during the six month moratorium period between March 1, 2020 to August 31, 2020 would amount to approximately Rs 7,000 crore across the industry- including banks, NBFCs and co-operative banks.
According to ICRA Limited, the compounded interest for six month of moratorium across all lenders is estimated at Rs 13,500-14,000 crore. Of this, the government had already announced relief for borrowers with borrowings of up to Rs 2 crore, which was estimated to cost Rs 6,500 crore to exchequer as per ICRA. Therefore, the additional relief of Rs 7,000-7,500 crore will need to be provided to borrowers with loans of over Rs 2 crore, in compliance with the March 23 Supreme Court order.
When asked what the provision hit/refund amount per bank would likely be, one of the executives quoted earlier said, "For the two-three largest banks also, the total amount for loans of more than Rs 2 crore will not be more than Rs 300 crores each."
Meanwhile, the Reserve Bank has asked banks to "immediately put in place a Board-approved policy to refund/adjust the ‘interest on interest’ charged to the borrowers during the moratorium period, i.e. March 1, 2020 to August 31, 2020 in conformity with the above judgement (SC order dated March 23). In order to ensure that the above judgement is implemented uniformly in letter and spirit by all lending institutions, methodology for calculation of the amount to be refunded/adjusted for different facilities shall be finalised by the Indian Banks Association (IBA) in consultation with other industry participants/bodies, which shall be adopted by all lending institutions."
RBI further clarified, "The above reliefs shall be applicable to all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed."
The regulator also said that the asset classification for borrowers who did not avail of the moratorium would continue as per Income Recognition and Asset Classification (IRAC) norms, and for borrowers who availed of the moratorium, asset classification would be as per IRAC norms with effect from September 1, 2020.
"Banks had asked IBA (Indian Banks Association) to make a representation to the government, and seek clarity on the compound interest matter. IBA reached out to the government, but they have not responded to us yet," said the head of a large public sector bank on the condition of anonymity.
"We (banks) have decided that we will fully provide for the refund amount in the March quarter, and see what stand the government takes on the matter. If they agree to cover the cost, we will be able to write back these provisions," said another senior banker on the condition of anonymity. This banker added that this decision was taken unanimously by lenders in a meeting held by IBA after the Supreme Court order was made public.
Bankers believe that even if the government agrees to bear the burden of this waiver, it was unlikely to compensate bankers immediately. Therefore, the required provision would have to be made now irrespective.
The Supreme Court had ruled that no compound or penal interest would be charged from borrowers for the entire six-month loan moratorium period, which was announced last year amid the COVID-19 pandemic. The apex court also ruled that the amount already charged would have to be refunded, credited or adjusted.
According to people in the know, the Indian Banks Association calculated the "interest on interest" cost for loans of over Rs 2 crore during the six month moratorium period between March 1, 2020 to August 31, 2020 would amount to approximately Rs 7,000 crore across the industry- including banks, NBFCs and co-operative banks.
According to ICRA Limited, the compounded interest for six month of moratorium across all lenders is estimated at Rs 13,500-14,000 crore. Of this, the government had already announced relief for borrowers with borrowings of up to Rs 2 crore, which was estimated to cost Rs 6,500 crore to exchequer as per ICRA. Therefore, the additional relief of Rs 7,000-7,500 crore will need to be provided to borrowers with loans of over Rs 2 crore, in compliance with the March 23 Supreme Court order.
When asked what the provision hit/refund amount per bank would likely be, one of the executives quoted earlier said, "For the two-three largest banks also, the total amount for loans of more than Rs 2 crore will not be more than Rs 300 crores each."
Meanwhile, the Reserve Bank has asked banks to "immediately put in place a Board-approved policy to refund/adjust the ‘interest on interest’ charged to the borrowers during the moratorium period, i.e. March 1, 2020 to August 31, 2020 in conformity with the above judgement (SC order dated March 23). In order to ensure that the above judgement is implemented uniformly in letter and spirit by all lending institutions, methodology for calculation of the amount to be refunded/adjusted for different facilities shall be finalised by the Indian Banks Association (IBA) in consultation with other industry participants/bodies, which shall be adopted by all lending institutions."
RBI further clarified, "The above reliefs shall be applicable to all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed."
The regulator also said that the asset classification for borrowers who did not avail of the moratorium would continue as per Income Recognition and Asset Classification (IRAC) norms, and for borrowers who availed of the moratorium, asset classification would be as per IRAC norms with effect from September 1, 2020.
First Published: Apr 7, 2021 9:35 PM IST
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